Yields at Alpha Financial Markets Consulting (LON:AFM) are up

Did you know that there are financial metrics that can provide clues to a potential multi-bagger? Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So when we looked Alpha Financial Markets Consulting (LON:AFM) and its ROCE trend, we really liked what we saw.

Return on capital employed (ROCE): what is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. To calculate this metric for Alpha Financial Markets Consulting, here is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.10 = £16m ÷ (£204m – £51m) (Based on the last twelve months to September 2021).

So, Alpha Financial Markets Consulting has a ROCE of 10%. In absolute terms, that’s pretty standard performance, but compared to the professional services industry average, it lags behind.

Discover our latest analysis for Alpha Financial Markets Consulting

AIM:AFM Return on Capital Employed April 8, 2022

Above, you can see how Alpha Financial Markets Consulting’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you wish, you can view forecasts from analysts covering Alpha Financial Markets Consulting here for free.

What the ROCE trend can tell us

Alpha Financial Markets Consulting shows positive trends. Figures show that over the past four years, returns generated on capital employed have increased significantly to 10%. Basically, the business earns more per dollar of invested capital and on top of that, 75% more capital is also utilized now. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, a common combination among multi-baggers.

By the way, we noticed that the improvement in ROCE seems to be partly fueled by an increase in current liabilities. Current liabilities have increased to 25% of total assets, so the company is now financed more by suppliers or short-term creditors. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, certain aspects of risk also increase.

The essential

Overall, it is great to see that Alpha Financial Markets Consulting is reaping the rewards of past investments and increasing its capital base. And investors seem to expect more in the future, as the stock has rewarded shareholders with a 73% return over the past three years. That being said, we still think the promising fundamentals mean the company merits further due diligence.

If you want to know the risks faced by Alpha Financial Markets Consulting, we have discovered 5 warning signs of which you should be aware.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.